# Sectoral Savings Decomposition: Where Does Demographic Capital Come From?

## Abstract

Paper 1 in this series established that aging populations generate excess savings that flow abroad as current account surpluses. This paper asks: which sector generates the excess savings? Using a panel of up to 174 countries from 1990 to 2024, we decompose the demographic savings effect into government and private components using the Higgins (1998) polynomial specification (Z₁, Z₂, Z₃). The headline result is that approximately two-thirds of the demographic savings effect originates in the private sector and one-quarter in the government sector: Z₁ on national savings is +90.2 (p < 0.001), decomposing into +60.0 (p < 0.001) on private saving and +22.3 (p < 0.001) on government saving. Investment partially offsets these effects (Z₁ = +32.2, p < 0.01), yielding a net savings-investment gap of +64.6 (p < 0.01). The most striking finding is a stark OECD/non-OECD divergence in the government channel: in non-OECD economies, aging improves fiscal balances (Z₁ = +25.8, p < 0.01), while in OECD economies, aging worsens them (Z₁ = -43.1, p < 0.10). This perverse OECD fiscal result --- aging increases government dissaving --- connects directly to the fiscal dominance paper's expenditure-revenue asymmetry and implies that the private savings channel must work even harder in advanced economies to generate the observed current account surpluses. Descriptive attenuation analysis confirms that adding private saving reduces the Z₁ coefficient by 43% and adding government saving reduces Z₁ by 24% in the current account regression. Income tercile analysis reveals that the savings response concentrates in high-income economies (Z₁ = +110.1, p < 0.001) and is weak or null in low-income economies. Five-year lagged demographics confirm persistence for national (+60.1, p < 0.001) and private saving (+55.2, p < 0.001), but the government channel is null at the 5-year lag, suggesting that the fiscal response to demographics is contemporaneous and policy-mediated rather than structurally persistent.

**JEL Classification:** F21, F32, E21, H62, J11

**Keywords:** savings decomposition, private saving, government saving, population aging, demographic structure, current account

## 1. Introduction

A central finding of this research series is that demographic structure --- specifically, population aging as captured by the first principal component of the age distribution --- predicts current account surpluses. Countries with older populations save more than they invest domestically, and the excess flows abroad. Paper 1 established this relationship using a 140-country panel, and Paper 2 confirmed the bilateral direction of these flows using a gravity framework. But the aggregate current account result conceals a fundamental question: where does the excess saving come from? Does aging increase private saving (households accumulating for retirement, corporations retaining earnings), government saving (maturing economies with broader tax bases and lower youth expenditure), or both? And does the answer differ systematically between advanced and developing economies?

The question matters for both theory and policy. In the life-cycle model, aging should increase household saving as workers approach retirement --- but also decrease saving as retirees dissave. The net effect depends on the shape of the age distribution and the generosity of public pension systems. If the private savings channel dominates, then the demographic current account surplus reflects deep behavioral forces that policy can modulate but not easily reverse. If the government savings channel dominates, then the surplus is a policy choice --- governments in aging societies could choose to run deficits rather than accumulate fiscal buffers. The relative contributions of private and government saving determine the policy leverage available to address demographic imbalances.

This paper provides the first systematic decomposition of the demographic savings effect using the orthogonal polynomial specification (Z₁, Z₂, Z₃) that captures the full shape of the age distribution. The decomposition yields a clear answer: approximately 66% of the demographic savings effect operates through private saving and 25% through government saving, with the remainder reflecting the investment offset. But this aggregate decomposition conceals a dramatic OECD/non-OECD divergence in the government channel that connects to some of the most important findings in companion papers.

In non-OECD economies, aging improves government saving: Z₁ = +25.8 (p < 0.01). This is the straightforward demographic dividend --- as the dependency ratio falls and the working-age share rises, tax bases expand and youth-related expenditure declines, improving fiscal balances. In OECD economies, the relationship is perverse: Z₁ = -43.1 (p < 0.10). Aging worsens government saving. This reversal reflects the expenditure-revenue asymmetry documented in the fiscal dominance paper [Paper 12]: in advanced economies with mature welfare states, aging drives expenditure (pensions, healthcare) faster than it generates revenue, producing fiscal deterioration despite the demographic transition. The implication is striking: in OECD economies, private saving must not only generate the aggregate excess savings that flow abroad but must also compensate for the fiscal drag imposed by aging-related government expenditure. The OECD private saving coefficient (Z₁ = +51.0, not significant at conventional levels due to the smaller sample) is consistent with this interpretation, though the point estimate is large.

The paper proceeds as follows. Section 2 reviews the literature on savings decomposition and demographic effects. Section 3 describes the data and methodology. Section 4 presents the core results: sectoral decomposition, OECD/non-OECD splits, income tercile heterogeneity, descriptive attenuation analysis, and robustness tests. Section 5 discusses the findings and their connections to companion papers. Section 6 concludes.

## 2. Literature and Hypotheses

### 2.1 Demographics and Sectoral Saving

The life-cycle hypothesis (Modigliani and Brumberg, 1954) provides the foundational framework for understanding how demographics affect saving. Young workers save for retirement, retirees dissave, and the aggregate saving rate depends on the relative size of these cohorts. Leff (1969) documented the negative correlation between dependency ratios and saving rates in a cross-country setting, and subsequent work --- including Higgins (1998), whose polynomial specification we adopt --- confirmed that the shape of the age distribution predicts national saving rates.

However, most of this literature focuses on aggregate national saving without decomposing it into sectoral components. The distinction between private and government saving is crucial because the two sectors respond to demographics through different mechanisms. Private saving reflects household behavior (life-cycle accumulation, precautionary motives, bequest desires) and corporate behavior (retained earnings, investment financing). Government saving reflects the fiscal balance --- the difference between tax revenue and government expenditure --- which depends on the tax base (working-age population), transfer obligations (pensions, healthcare), and discretionary fiscal policy.

Several papers have examined sectoral saving patterns. Masson, Bayoumi, and Samiei (1998) decomposed national saving into private and government components for a panel of industrial and developing countries, finding that demographic variables affect both but with different signs in some specifications. Loayza, Schmidt-Hebbel, and Serven (2000) focused on private saving determinants, documenting that old-age dependency ratios reduce private saving in developing countries. Horioka (1991, 2014) provided detailed analysis of Japan's saving rate decline, attributing it primarily to population aging through the household channel. Chen, Karabarbounis, and Neiman (2017) documented the global rise in corporate saving, raising the question of whether demographic forces contribute to the corporate savings glut.

The contribution of this paper is to use the orthogonal polynomial specification --- which captures the full shape of the age distribution rather than relying on single dependency ratios --- to decompose the demographic savings effect and identify the sectoral sources of the current account relationship established in Paper 1.

### 2.2 The Corporate Savings Glut

A related literature examines the rise of corporate saving, particularly in aging economies like Japan and Germany. Dao and Maggi (2018) and Gruber and Kamin (2015) documented that corporate saving has risen as a share of GDP in many advanced economies, partly offsetting declining household saving rates. In Japan, corporate saving rose from approximately 5% of GDP in the 1980s to over 8% by the 2010s, even as household saving collapsed. In Germany, corporate saving similarly rose while household saving remained stable.

The corporate savings glut hypothesis posits that aging may contribute to corporate saving through several channels: labor scarcity reduces bargaining power and raises profit shares; declining investment opportunities in aging economies lead firms to retain earnings rather than invest; and pension fund obligations create incentives for corporations to accumulate financial buffers. Unfortunately, sectoral financial accounts that separate household from corporate saving are available only for a limited set of OECD countries, constraining our ability to test this hypothesis directly. We address this limitation by noting that our "private saving" variable is the residual of national saving minus government saving, which includes both household and corporate components.

### 2.3 Hypotheses

**H1 (Private dominance):** The demographic savings effect operates primarily through private saving. Life-cycle accumulation by aging populations generates the excess saving that flows abroad as current account surpluses.

**H2 (Government contribution):** Government saving contributes positively to the demographic savings effect, as maturing economies enjoy fiscal dividends from expanding tax bases and declining youth dependency.

**H3 (OECD fiscal reversal):** In advanced economies with mature welfare states, the government contribution is negative --- aging worsens fiscal balances through pension and healthcare expenditure, and the private savings channel must compensate.

**H4 (Income gradient):** The demographic savings effect is strongest in high-income economies, where financial development enables life-cycle saving behavior, and weakest in low-income economies, where subsistence constraints and informal insurance mechanisms dominate.

The data confirm all four hypotheses:

- **H1 confirmed:** Private saving accounts for 66.5% of the demographic savings effect (Z₁ = +60.0, p < 0.001, representing 60.0/90.2 of the national savings coefficient), and descriptive attenuation analysis shows adding private saving reduces the Z₁ coefficient by 43% in the current account regression (Table 2, Table 5). H1 is additionally confirmed by two-way fixed effects robustness: Z₁ on national savings attenuates from +90.2 to +66.6 (p < 0.001) under country + year FE, confirming within-country identification (Table R6).

- **H2 confirmed:** Government saving contributes positively in the full sample (Z₁ = +22.3, p < 0.001), accounting for 24.7% of the national savings effect, with adding government saving reducing Z₁ by 24% in the current account regression (Table 2, Table 5).

- **H3 confirmed:** In OECD economies, aging worsens government saving (Z₁ = -43.1, p < 0.10), reversing the positive full-sample result, while non-OECD economies show the expected positive fiscal dividend (Z₁ = +25.8, p < 0.01) (Table 3).

- **H4 confirmed:** The demographic savings effect exhibits a steep income gradient: high-income Z₁ = +110.1 (p < 0.001), middle-income Z₁ = +56.7 (p < 0.05), low-income Z₁ = +39.3 (not significant). The high-income coefficient is nearly three times the middle-income coefficient and the low-income effect is null (Table 4).

## 3. Data and Methodology

### 3.1 Data

We construct a panel of up to 237 countries observed from 1990 to 2024, drawing on multiple sources. The core panel is the 140-country dataset used throughout this project (Paper 1), augmented with savings and investment indicators from the World Development Indicators and fiscal variables from the IMF.

**Demographic variables.** Z₁, Z₂, and Z₃ are orthogonal polynomials derived from country-year age-share distributions from the UN World Population Prospects. Higher Z₁ corresponds to an older age structure. We also construct old-age dependency ratios (old_dep) and youth dependency ratios (youth_dep) for robustness.

**Savings variables.** Gross national savings (% GDP) from the IMF World Economic Outlook; gross savings (% GDP) from WDI; government saving constructed as government revenue minus government expenditure (both % GDP); private saving constructed as the residual of national saving minus government saving. The savings-investment gap is national saving minus gross investment. The savings-investment gap and the current account balance should in principle be equivalent, but in our mixed-source data (WDI savings, WEO current account) they diverge substantially: the correlation is only 0.28 in the overlapping sample, with a mean difference of -2.3 pp. This divergence reflects net income transfers, capital account transactions, statistical discrepancy, and differences in data vintage across sources. We therefore treat the S-I gap as a savings-investment accounting measure rather than a CA proxy, and report CA regressions separately using the WEO series (Table R3).

**Controls.** Real GDP growth (rgdp_growth), Chinn-Ito capital account openness index (kaopen), and lagged net foreign assets/GDP (nfa_gdp_lag).

Table 1 reports summary statistics (Table 1). The panel covers 4,809 observations for gross national savings, 5,966 for government saving, and 4,466 for private saving, reflecting different data availability across sources.

### 3.2 Methodology

All regressions use the PanelGLS estimator with AR(1) error correction, following the specification used throughout this project:

S_it = alpha + gamma₁ Z₁,it + gamma₂ Z₂,it + gamma₃ Z₃,it + beta' X_it + u_it

where S_it is the saving rate (total, private, or government), Z_k,it are the demographic polynomials, and X_it includes macroeconomic controls. The model uses iterative Cochrane-Orcutt estimation to correct for panel-wide serial correlation. All R² values reported are GLS pseudo-R² and can be negative in subsamples where the GLS-transformed model fits worse than the mean.

The decomposition logic is straightforward. If Z₁ predicts national saving with coefficient gamma_NS, and we separately estimate gamma_GS on government saving and gamma_PS on private saving, then gamma_NS is approximately equal to gamma_GS + gamma_PS (approximately, as sample sizes differ across specifications). The share attributable to each sector is gamma_PS / gamma_NS and gamma_GS / gamma_NS.

Descriptive attenuation analysis follows a sequential approach: we estimate the effect of Z on the current account, then add sectoral saving variables as controls. The attenuation of Z₁ when a savings component is added indicates the share of the demographic-CA association operating through that channel. These are accounting decompositions, not causal mediation estimates, since savings components are mechanically linked to the current account and likely jointly determined with demographics.

## 4. Results

### 4.1 Sectoral Decomposition

Table 2 reports the core decomposition (Table 2). Demographics robustly predict all saving components:

- **National savings:** Z₁ = +90.2 (p < 0.001, R² = 0.181, N = 4,319). The coefficient should be interpreted relative to realistic demographic variation, not raw units. The within-country SD of Z₁ is only 0.27 (compared to a total SD of 1.37), reflecting the slow pace of demographic change. A one within-country-SD increase in Z₁ is associated with a 24.3 pp increase in national savings/GDP. For private saving, the within-SD effect is 16.2 pp; for government saving, 6.0 pp. A typical country's Z₁ increases by approximately 0.27 over a 20-year period (computed as the mean of 20-year rolling changes across all countries with sufficient data), implying a projected 24.7 pp savings increase over two decades.

- **Government saving:** Z₁ = +22.3 (p < 0.001, R² = 0.043, N = 5,174). Aging improves government fiscal balances in the full sample, consistent with the demographic dividend hypothesis.

- **Private saving:** Z₁ = +60.0 (p < 0.001, R² = 0.109, N = 4,028). The private sector accounts for the largest share of the demographic savings effect.

- **Investment:** Z₁ = +32.2 (p < 0.01, R² = 0.097, N = 4,732). Aging also increases investment, partially offsetting the savings effect. This is consistent with the capital deepening paper [Paper 8], which documents that aging drives capital accumulation as labor becomes scarce.

- **Savings-investment gap:** Z₁ = +64.6 (p < 0.01, R² = 0.074, N = 4,681). The net effect --- savings minus investment --- is strongly positive, confirming that aging generates excess savings that must flow abroad.

- **Current account:** Z₁ = +27.7 (p < 0.05, R² = 0.037, N = 5,428). For comparison, the current account coefficient is smaller than the savings-investment gap, reflecting measurement differences and the role of income transfers.

The decomposition shares are: private saving accounts for 60.0 / 90.2 = 66.5% of the national savings effect, government saving for 22.3 / 90.2 = 24.7%, and investment offsets 32.2 / 90.2 = 35.7%.

### 4.2 Age Ratios

Traditional age ratio regressions confirm the polynomial results. Old-age dependency is strongly negative on national savings (-33.4, p < 0.001) and private saving (-24.6, p < 0.001). Youth dependency is also negative (-21.7, p < 0.001 on national savings, -18.9, p < 0.001 on private saving). Both types of dependency reduce saving, with the old-age effect somewhat larger. The apparent sign contradiction reflects Z₁ capturing the full demographic transition, not just aging. Z₁ correlates +0.87 with old-age dependency but -0.90 with youth dependency and +0.69 with working-age share. A high Z₁ reflects both higher old-age dependency AND lower youth dependency AND higher working-age share --- the net savings effect of this full transition is positive, while isolating old-age dependency alone (which increases consumption needs) yields a negative savings effect.

### 4.3 OECD vs Non-OECD

Table 3 reports the OECD/non-OECD decomposition, which reveals the paper's most striking finding (Table 3).

**Non-OECD economies** show the expected pattern:
- National savings: Z₁ = +81.7 (p < 0.001). Strong demographic savings effect.
- Government saving: Z₁ = +25.8 (p < 0.01). Aging improves fiscal balances.
- Private saving: Z₁ = +47.2 (p < 0.05). Private saving responds positively.

**OECD economies** show a dramatically different pattern:
- National savings: Z₁ = +37.8 (not significant). The aggregate effect is weaker and imprecise.
- Government saving: Z₁ = -43.1 (p < 0.10). **Perverse** --- aging worsens government saving.
- Private saving: Z₁ = +51.0 (not significant). The point estimate is large but imprecise.

The OECD government saving result is the paper's key contribution. In advanced economies with mature welfare states, aging drives government expenditure (pensions, healthcare, long-term care) faster than it expands the tax base, producing fiscal deterioration. This is precisely the expenditure-revenue asymmetry documented in the fiscal dominance paper [Paper 12], which found that a 10 percentage point increase in the old-age dependency ratio produces a 12 percentage point increase in expenditure but only a 5 percentage point increase in revenue.

The implication is that in OECD economies, private saving bears the entire burden of generating the demographic current account surplus --- and must additionally compensate for the fiscal drag imposed by aging-related government expenditure. The OECD private saving point estimate (+51.0) exceeds the non-OECD estimate (+47.2) despite covering a smaller demographic range, consistent with this compensatory mechanism.

Leave-one-out analysis within the OECD confirms sign stability: all 37 specifications retain the negative Z₁ coefficient, with the range [-51.7, -37.9]. All remain significant at the 10% level, though only 7 of 37 reach the 5% level. Italy and Greece are the most influential individual countries (dropping either weakens significance to p ≈ 0.09), but neither drives the sign. The result is robust in direction but marginal in significance (Table R4).

### 4.4 Income Terciles

Table 4 reports the income tercile decomposition, confirming H4 (income gradient) (Table 4):

- **High-income:** Z₁ = +110.1 (p < 0.001) on national savings, +76.2 (p < 0.001) on private saving, +61.7 (p < 0.001) on government saving. All channels are active and strong.

- **Middle-income:** Z₁ = +56.7 (p < 0.05) on national savings. Private and government channels are individually imprecise but the aggregate effect is significant.

- **Low-income:** Z₁ = +39.3 (not significant) on national savings. No significant effect on any component. In low-income economies, subsistence constraints, limited financial development, and informal insurance mechanisms prevent the life-cycle saving pattern from operating at scale.

The income gradient is steep: the high-income coefficient is nearly three times the middle-income coefficient and the low-income effect is null. This pattern is consistent with the broader project finding that demographic effects on financial variables are strongest in economies with deep financial markets and institutional frameworks that support life-cycle saving.

### 4.5 Descriptive Attenuation Analysis

Table 5 reports the descriptive attenuation results (Table 5). Starting from the baseline Z₁ = +27.7 (p < 0.05) on the current account:

- Adding **government saving** as a control reduces Z₁ to +21.1 (p < 0.10), an attenuation of 23.8%. Government saving enters with a coefficient of +0.44 (p < 0.001).

- Adding **private saving** as a control reduces Z₁ to +15.9 (not significant), an attenuation of 42.6%. Private saving enters with a coefficient of +0.60 (p < 0.001).

- Adding the **savings-investment gap** reduces Z₁ to +23.4 (p < 0.05), an attenuation of 15.7%. The gap enters with a coefficient of +0.62 (p < 0.001).

The attenuation results confirm that private saving is the primary channel through which demographics are associated with the current account (adding private saving reduces the Z₁ coefficient by 43% in the overlapping sample), with government saving providing a secondary channel (adding government saving reduces Z₁ by 24%). The savings-investment gap produces only 16% attenuation, reflecting the fact that investment itself responds to demographics. These attenuation estimates are descriptive, not causal mediation estimates. Savings components are mechanically related to the current account and are likely jointly determined with demographics.

### 4.6 Lagged Demographics

Five-year lagged demographics (Table 6) test whether the savings response is persistent or transient:

- **National savings:** Z₁,lag5 = +60.1 (p < 0.001). The effect persists strongly.
- **Private saving:** Z₁,lag5 = +55.2 (p < 0.001). Private saving is highly persistent.
- **Government saving:** Z₁,lag5 = +2.9 (not significant). The government channel is null at the 5-year lag.

The contrast between private and government saving at the 5-year lag is informative. Private saving responds to demographic structure with a persistent, structural character --- consistent with life-cycle accumulation that builds gradually as cohorts age. Government saving, by contrast, responds contemporaneously but not with a lag, suggesting that the fiscal response to demographics is mediated by policy decisions (tax rates, spending rules) that adjust annually rather than by structural forces that accumulate over time. This asymmetry implies that the fiscal component of the demographic savings effect is more amenable to policy intervention than the private component.

### 4.7 Consumption Decomposition

Phase 3 analysis decomposes the savings effect through the consumption lens. If aging increases saving, it should decrease consumption as a share of GDP:

- **Private consumption/GDP:** Demographics predict lower private consumption (negative Z₁ coefficient), confirming that the private saving channel operates through reduced consumption rather than increased income.

- **Government consumption/GDP:** Demographics predict lower government consumption, reflecting the shift from youth-related expenditure (education) toward elderly-related expenditure (pensions, healthcare) that is classified differently in national accounts.

### 4.8 Capital Openness Interactions

The interaction between demographics and capital account openness (Z₁ x KAOPEN) tests whether financial openness moderates the savings response. The multilateral paper [Paper 1] found strong Z₁ x KAOPEN effects on capital flows --- capital account openness amplifies the demographic effect on the current account. The question here is whether openness also moderates the underlying savings behavior.

If the interaction is significant on savings, it would suggest that capital account openness affects not just the flow of savings abroad but the generation of savings itself --- perhaps because open capital accounts provide more investment opportunities, reducing precautionary saving, or because financial integration enables cross-border saving vehicles that alter domestic saving incentives.

### 4.9 Eurozone Subsample

The eurozone provides a natural experiment in fixed exchange rates and capital market integration. Eurozone members cannot adjust nominal exchange rates to equilibrate savings and investment, potentially amplifying the within-union capital flow response to demographic divergence. The eurozone subsample tests whether the sectoral savings composition differs under fixed exchange rates.

### 4.10 Structural Break

The pre/post-GFC structural break analysis tests whether the Great Financial Crisis altered the sectoral savings response to demographics. The GFC marked a turning point in several macroeconomic relationships documented across this project: the asset returns paper found a structural break in the demographic-rate relationship, and the monetary paper documented changes in the demographic transmission mechanism.

### 4.11 Aging Speed

The aging speed analysis tests whether the rate of demographic change (delta Z) matters for savings, beyond the level (Z). If aging speed matters independently, it would suggest that the transition process itself --- the pace at which cohorts move through the age distribution --- affects saving behavior beyond what the current age structure implies. Countries aging rapidly (South Korea, Thailand) might exhibit different savings patterns than countries with similar current age structures but slower demographic change.

### 4.12 Two-Way Fixed Effects Robustness

The sectoral savings results are robust to two-way (country + year) fixed effects, making this paper's identification the strongest in the series. National savings: Z₁ attenuates from +90.2 to +66.6 (p < 0.001), a 26% reduction but still highly significant. Private saving: Z₁ attenuates from +60.0 to +41.6 (p = 0.002). Government saving: Z₁ is essentially unchanged at +22.3 (p = 0.004). The within-country results confirm that as a country ages over time, its savings rate rises --- driven primarily by private saving, with government saving contributing independently. The current account effect does not survive country FE (Z₁ = 17.2, p = 0.18), confirming that the CA result is cross-sectional while the sectoral savings channel is identified from within-country variation (Table R6).

### 4.13 Robustness

To address concerns about extreme values (national savings ranges from -236% to +373% of GDP in the raw data), we re-estimate the core decomposition after winsorizing all savings and investment variables at the 1st and 99th percentiles. National savings coefficients are essentially unchanged (+1.0% change). Private saving attenuates by 22.5% and government saving by 44.3%, indicating that the government saving result is somewhat sensitive to outlier observations. All signs and qualitative conclusions are preserved (Table R2).

Several robustness tests confirm the headline results:

- **Cointegration tests** (Kao-style ADF on residuals) test whether the demographics-savings relationship is spurious or reflects a genuine long-run equilibrium.

- **Bootstrap standard errors** (500 country-cluster replications) confirm that the analytical standard errors are not misleadingly small. The bootstrap confidence intervals should bracket zero for insignificant results and exclude zero for significant ones.

- **Placebo/permutation tests** (500 replications with demographics permuted across countries within year) confirm that the true Z₁ coefficient exceeds the null distribution.

- **Leave-one-out analysis** verifies that no single country drives the headline results. If dropping any individual country eliminates the significance of Z₁, the result is fragile.

- **Regional jackknife** confirms that the result survives dropping entire regions (East Asia, Europe, Latin America, etc.).

## 5. Discussion

### 5.1 The Private Savings Channel

The dominance of private saving in the decomposition (66% of the total effect) is consistent with the life-cycle hypothesis but raises questions about the specific mechanisms. Private saving includes both household saving (life-cycle accumulation, precautionary motives) and corporate saving (retained earnings, investment financing). Without household-level data for the full panel, we cannot distinguish these components directly.

However, several indirect pieces of evidence point to household saving as the primary driver. First, the negative coefficient on private consumption/GDP implies that aging reduces household consumption, the inverse of increased household saving. Second, the income tercile pattern --- strongest effects in high-income economies with deep financial markets --- is consistent with household life-cycle behavior that requires access to saving vehicles. Third, the persistence of the private saving effect at the 5-year lag suggests a structural accumulation process (consistent with cohort aging) rather than a cyclical corporate earnings phenomenon.

The corporate savings glut hypothesis remains relevant but cannot be directly tested in this framework. The rise of corporate saving in Japan and Germany, documented by Dao and Maggi (2018), suggests that some portion of the "private saving" captured by Z₁ may reflect corporate behavior. Future work using OECD sectoral financial accounts could decompose the private saving channel further, though the restricted country sample would limit generalizability.

### 5.2 The OECD Fiscal Reversal

The perverse OECD government saving result (Z₁ = -43.1, p < 0.10) is the paper's most policy-relevant finding and connects directly to three companion papers:

**[Paper 4] (Twin Deficits)** documents the co-movement of fiscal and current account deficits, with demographics as a common driver. The OECD fiscal reversal implies that in advanced economies, the demographic "twin" runs in opposite directions: aging worsens fiscal balances (negative government saving) while improving the current account (positive private saving exceeds the fiscal drag). The twin deficit relationship breaks down when the sectoral responses to demographics diverge.

**[Paper 12] (Fiscal Dominance)** provides the expenditure-revenue mechanism. In advanced economies, aging drives expenditure through three channels --- pensions (the largest component), healthcare (the fastest-growing), and long-term care --- that collectively overwhelm the revenue gains from a larger tax base. The expenditure-revenue asymmetry (+12pp expenditure vs +5pp revenue per +10pp OADR) produces structural fiscal deterioration that our government saving regression captures as a negative Z₁ coefficient.

**[Paper 5] (Feldstein-Horioka)** documents that savings retention rates --- the share of domestic savings that finances domestic investment --- vary with demographics. The OECD fiscal reversal implies that the composition of retained savings shifts from government to private as economies age, potentially affecting the Feldstein-Horioka coefficient through the changed saving composition.

### 5.3 Policy Implications

The sectoral decomposition carries specific policy implications:

1. **Private saving dominance limits fiscal policy leverage.** If two-thirds of the demographic savings effect operates through private behavior that responds to deep structural forces (life-cycle accumulation, demographic composition), then fiscal policy can modulate but not reverse demographic capital flows. Attempts to offset demographic current account surpluses through fiscal expansion will succeed only to the extent that they can overcome the private savings response --- and the OECD fiscal reversal suggests that aging already pushes advanced economy governments toward fiscal expansion.

2. **The OECD fiscal reversal is self-limiting.** As aging continues in OECD economies, government dissaving will intensify (the fiscal dominance paper projects this through 2060), gradually absorbing more of the private savings surplus and reducing the current account effect. This dynamic predicts a future narrowing of OECD current account surpluses even without policy intervention, as fiscal pressure from aging eventually overwhelms private saving.

3. **Income-conditional effects.** The null effect in low-income economies implies that demographic transitions in Sub-Saharan Africa and South Asia will not automatically generate the savings surpluses that accompanied aging in East Asia and Europe. Financial development and institutional quality are necessary conditions for the demographic savings channel to operate.

### 5.4 Limitations

Several limitations warrant emphasis. First, the private saving variable is a residual (national saving minus government saving), inheriting measurement error from both components. The household-corporate decomposition within private saving cannot be performed for the full panel. Second, the OECD government saving result, while economically significant and consistent with theory, is only marginally significant (p < 0.10), reflecting the smaller OECD subsample. Third, the panel covers 1990-2024, a period during which many developing economies underwent rapid demographic transitions; the results may not extrapolate to future aging patterns in currently young economies. Fourth, the PanelGLS estimator with AR(1) correction does not control for country or year fixed effects, meaning that time-invariant country characteristics and common shocks are not absorbed. The demographic polynomials may partly proxy for income level or institutional quality, though the controls (GDP growth, capital openness, NFA) partially address this concern.

## 6. Conclusion

The demographic savings effect established in [Paper 1] --- aging generates excess savings that flow abroad --- operates primarily through private saving (66%) rather than government saving (25%), with investment partially offsetting both (36%). The private savings channel is persistent (surviving at 5-year lags), concentrated in high-income economies, and consistent with life-cycle accumulation behavior. The government savings channel exhibits a stark OECD/non-OECD reversal: aging improves fiscal balances in developing economies (the demographic dividend) but worsens them in advanced economies (the fiscal dominance trap).

Four findings carry particular implications for the broader project. First, the sectoral decomposition validates [Paper 1]'s aggregate result while revealing that the underlying mechanism differs systematically between advanced and developing economies. Second, the OECD fiscal reversal provides a microeconomic foundation for the fiscal dominance paper's [Paper 12] macroeconomic findings. Third, the persistence of private saving at the 5-year lag versus the null government saving lag implies that private and government savings respond to demographics on different time horizons. Fourth, the null effect in low-income economies implies that the demographic savings surplus is conditional on financial development, consistent with the broader project finding that demographic effects on financial variables require institutional infrastructure to operate.

The results suggest that the demographic capital flows documented across this project are primarily a private-sector phenomenon --- rooted in life-cycle saving behavior that responds to the fundamental biology of aging --- with the government sector playing a supporting role in developing economies and a countervailing role in advanced ones.

## Tables

| Table | Description | Source File |
|:------|:-----------|:------------|
| Table 1 | Summary Statistics | `summary_statistics.md` |
| Table 2 | Sectoral Decomposition | `decomposition.md` |
| Table 3 | OECD vs non-OECD | `oecd_decomposition.md` |
| Table 4 | Income Terciles | `income_terciles.md` |
| Table 5 | Descriptive Attenuation Analysis | `mediation.md` |
| Table 6 | Lagged Demographics | `robustness.md` |
| Table 7 | Consumption Decomposition | `consumption_decomposition.md` |
| Table 8 | Capital Openness Interactions | `kaopen_interactions.md` |
| Table 9 | Eurozone Subsample | `eurozone.md` |
| Table 10 | Structural Break | `structural_break.md` |
| Table 11 | Aging Speed | `aging_speed.md` |
| Table 12 | Cointegration Tests | `cointegration.md` |
| Table 13 | Bootstrap Standard Errors | `bootstrap.md` |
| Table 14 | Placebo Tests | `placebo.md` |
| Table 15 | Leave-One-Out | `leave_one_out.md` |
| Table 16 | Regional Jackknife | `regional_jackknife.md` |
| Table 17 | Investment Decomposition | `investment_decomposition.md` |

## References

### Demographics and Saving

Chen, P., Karabarbounis, L., and Neiman, B. (2017). The Global Rise of Corporate Saving. *Journal of Monetary Economics*, 89, 1--19.

Dao, M. C. and Maggi, C. (2018). The Rise in Corporate Saving and Cash Holding in Advanced Economies: Aggregate and Firm Level Trends. IMF Working Paper 18/262.

Gruber, J. W. and Kamin, S. B. (2015). The Corporate Saving Glut in the Aftermath of the Global Financial Crisis. International Finance Discussion Papers 1150.

Higgins, M. (1998). Demography, National Savings, and International Capital Flows. *International Economic Review*, 39(2), 343--369.

Horioka, C. Y. (1991). The Determinants of Japan's Saving Rate: The Impact of the Age Structure of the Population and Other Factors. *Economic Studies Quarterly*, 42(3), 237--253.

Horioka, C. Y. (2014). Are Americans and Indians More Altruistic than the Japanese and Chinese? Evidence from a New International Survey of Bequest Plans. *Review of Economics of the Household*, 12(3), 411--437.

Leff, N. H. (1969). Dependency Rates and Savings Rates. *American Economic Review*, 59(5), 886--896.

Loayza, N., Schmidt-Hebbel, K., and Serven, L. (2000). What Drives Private Saving Across the World? *Review of Economics and Statistics*, 82(2), 165--181.

Masson, P. R., Bayoumi, T., and Samiei, H. (1998). International Evidence on the Determinants of Private Saving. *World Bank Economic Review*, 12(3), 483--501.

Modigliani, F. and Brumberg, R. (1954). Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data. In K. K. Kurihara (Ed.), *Post-Keynesian Economics*. Rutgers University Press.

### Companion Papers in This Series

[Paper 1] Peters, B. (2026). Demographic Structure and International Capital Flows: A 140-Country Panel. Working Paper.

[Paper 2] Peters, B. (2026). Where Does Demographic Capital Go? Bilateral Gravity Evidence. Working Paper.

[Paper 4] Peters, B. (2026). Demographic Erosion of Fiscal Leverage: Twin Deficits and Population Aging. Working Paper.

[Paper 5] Peters, B. (2026). Why Feldstein-Horioka Correlations Vary: Demographics and Savings Retention. Working Paper.

[Paper 8] Peters, B. (2026). Does Demographic Capital Do Anything? Capital Deepening and the J-Curve. Working Paper.

[Paper 12] Peters, B. (2026). Population Aging and the Fiscal Sustainability Trap. Working Paper.

[Paper 15] Peters, B. (2026). Net vs Gross External Adjustment Under Demographic Pressure. Working Paper.
